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January 23, 2018

As the San Francisco Employees Retirement System (SFERS) Retirement Board prepares to vote tomorrow on a resolution to divest the fund from fossil fuel holdings, the Chief Investment Officer for SFERS, William Coaker Jr., and its independent economic consultants, NEPC, have released new memos recommending the Board reject the divestment proposal.

NEPC writes:

“It is NEPC’s opinion that divestment is the least efficient of these tools and a potentially costly option for SFERS. Removing a significant portion of the investable universe of securities that active money managers can invest in is, by definition, a restriction on diversification of the SFERS portfolio.”

NEPC estimates that divesting from Carbon Underground 200 companies would result in a one-time transaction cost of $1.2 million and a performance shortfall “within a range of $5.765 million to $23.058 million per annum.” This confirms the findings of a study by University of Chicago Law Professor Daniel Fischel, which found that divesting could cost SFERS up to $15.7 million annually and $201 billion over 50 years.

Coaker further notes that SFERS’ “existing holdings in the CU200 have been profitable” and that divestment would be a costly decision for the fund:

“If SFERS had divested of $450 million in equity investments in fossil fuel companies by July 1, 2017, between that date and December 31, 2017, it would have cost SFERS approximately $78 million in gain and about $27 million in excess returns over the MSCI ACWI.”

Both Coaker and NEPC acknowledge that divestment will not reduce carbon emissions or help the environment. Coaker writes:

“This cannot be emphasized enough: divestment does not reduce fossil fuels… While we think the awareness that proponents of divestment have brought to the issue of global warming is incredibly important, divestment does not even in the smallest way reduce carbon emissions… Divestment alone does not harm or punish companies that produce fossil fuels, and the only parties that could be negatively impacted by divestment are those that are not invested in them.”

NEPC not only agrees, but notes that divesting can actually cause more harm by taking away the ability their ability as shareholders to influence companies:

“While consideration of divestment may promote an illusion of ‘doing something’, it is one of the least effective tools available to impact climate change and protect the SFERS portfolio. In fact, divestment can reduce the influence the Plan will have on helping to create a cleaner environment, fund greener technologies and shape better climate policy.”

While doing nothing to help the environment, Coaker acknowledges that divesting would directly impact San Francisco pensioners. Divesting would likely require SFERS to “increase required contributions from the city-county of San Francisco as well as active employees.” Specifically, it would likely increase the employer contribution rate by 2.7 percent, increase the City’s contributions by $89 million, and prolong the high level of employee contribution rates.

Instead of divesting, both reports recommend a strategy of “positive investment actions,” including active engagement with other investors, proxy voting, increased investments in renewable energy, and the integration of ESG principles throughout the investment process. NEPC noted that “ESG integration is a far more effective step for SFERS to help improve our environmental future while remaining aligned with the fiduciary responsibility of a US defined benefit public pension system.”

Experts agree, divestment carries high costs and no rewards. That’s why cities, states, and pension funds across the country including Seattle, Vermont, and CalPERS have all recently rejected divestment.

The SFERS Retirement Board should heed the warnings of its economic experts and look out for the best interest of its pensioners by voting “no” on the divestment proposal.

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